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5 Simple Hedge Strategies for Volatile Times

Written by: Joe Mont02/22/12 - 8:00 AM EST

Tickers in this article:
STI

BOSTON ( TheStreet) -- Given the wild ride investors have faced since 2007, many are searching for ways to mitigate risk and keep volatile market forces from wreaking havoc on their finances.

Many such strategies have typically been either stunningly complex or locked within the domain of billionaires and mammoth institutions. Alternative investments (through an endowment-styled approach), forward contracts, swaps, options, derivatives and futures are among the weapons in a hedge fund's arsenal.

You don't need to be a hedge fund or multibillion-dollar institution to protect against market forces.

But what can the average, retail investor do if these options seem either too expensive or complicated?

The first bit of advice offered by Ernie Dawal, chief investment officer for wealth and investment management for Sun Trust Banks (STI) , is to understand that "average investor" is a misnomer.

"Everyone is going to differ in terms of their financial objective, their tolerance for risk, their desire to avoid taxes and their general knowledge of, or interest in, the financial market," he says. "Some of them are going to want to beat the Joneses; others want to be the Joneses."

Hedging, for most, is really "just a form of insurance," Dawal explains, and like any insurance, "it's important to know what the risks are that individuals need to hedge against or insure against."

Market volatility "The big risk that everybody always looks at is volatility in the market," Dawal says. "Historically you could count on one hand the number of days where the equity market was going up and down more than 3% or 5%. But back in 2010 and 2011, we had quite a number of those days. So the volatility we see, those swings and fluctuations, are arguably at historical highs."

"The velocity of change has increased dramatically," he adds. "We see price moves happen almost instantaneously and the average Joe or Jane who is sitting there holding individual securities or some other type of portfolio are ill-equipped to respond to those kinds of changes. Maybe that's a good thing, because perhaps they shouldn't be responding."

Instead, Dawal encourages a portfolio that is well-diversified, well-managed and built to weather such volatility. They key is to have assets that are not correlated over an extended period of time.

He sees a diversified portfolio as one that includes cash, bonds and "equities of all ilk -- growth, value and core; large-, mid- and small-cap; international and emerging markets."

"We would also recommend real assets, commodities, real estate, infrastructure, perhaps timber, managed futures, private equity and traditional alternatives," he adds. Ownership isn't enough; there needs to be a strategy for how these assets are used in a portfolio.

In the not-so-distant past, these strategies were out of reach for all but the most high-net-worth investors and institutions. Now many of those hedge fund-worthy strategies have been replicated for a more mainstream audience through mutual funds and ETFs.